Today, central banks and government agencies wield unprecedented influence, distorting free market signals in their quest to steer the economy. Interest rate tweaks, quantitative easing, and fiscal interventions have potentially synchronised asset classes like equities and bonds, eroding the negative correlation that once cushioned portfolios against volatility.
Translation: Trying to influence the rate at which prices change in our economy comes with side effects. Investing in shares and investing in bonds for example, used to be more ‘negatively correlated’ – when one dropped, the other might rise, kind of like a seesaw. Now, that seesaw effect is weaker, so your investments may not have the same protection from wild swings in price.
Considering macro events like geopolitical flare-ups, inflation spikes, or government policy shifts (eg: Trump tariffs), markets increasingly move in lockstep, and finding returns that march to their own beat is harder than ever. Some investors find the solution in early-stage investing.
Early-stage investing is putting money into new companies with big ideas but not a lot of history. If they make it, even a small investment can yield significant returns.
So high returns are the obvious draw card, but returns that have nothing to do with macro events, is what makes this asset class unique. Shares, bonds, crypto and property – all these investments change in value in response to changing interest rates. Despite its high risk of financial loss, early stage investing might offer the uncorrelated opportunity investors crave—tied not to global trends but to a company’s ability to solve a problem and generate revenue.
The Erosion of Traditional Diversification
For background, once, diversification was straightforward: shares zigged, and bonds zagged. Despite the circumstances in the world, classic balanced portfolios (60% shares and 40% bonds) portfolios stayed steady. Since the late 90’s however, as soon as significant volatility shows up, shares and bonds seems to move in the same direction (reference).
The search for assets that shrug off these macro currents has become a holy grail. Early-stage companies—startups in their infancy—present a compelling case. Their value doesn’t hinge on today’s interest rates or tomorrow’s trade wars but on long-term innovation. While a recession might rattle public markets, a startup’s mission to disrupt an industry or capture a niche can plow ahead, not bothered by all the noise.
The Resilience of Creation
Startups aren’t immune to economic downturns—capital can dry up, and not every venture survives. Yet history shows that great companies emerge in all conditions, and even during the recent period of high interest rates, finding money isn’t an issue, it’s finding good opportunities. Whether it’s a tech breakthrough or a novel business model, entrepreneurs keep building, driven by problems worth solving rather than market sentiment. This persistence offers a lifeline for investors. Unlike listed companies swayed by quarterly earnings or bond yields tied to monetary policy, a startup’s trajectory spans years, not cycles. It’s a brutal, free market experience, however. Most start ups fail, but the winners can deliver outsized returns, creating value from scratch in a way that defies broader trends.
A Different Kind of Risk and Reward
Venture capital fuels this space, channeling funds into privately held, often early-stage firms. Investors typically buy minority stakes—10-25%—backing founders with cash and expertise to scale their ideas. It’s not about controlling the company but betting on its potential. The catch? It’s illiquid and uncertain. You might wait a decade for a payout, and most ventures flop. Yet when one hits—solving a real problem with a scalable solution—the returns can dwarf traditional assets. This isn’t about timing the market; it’s about backing human ingenuity, where outcomes hinge on execution, not economics.
The Free Market’s Last Bastion
In a world of crony capitalism and planned economies, startup investing feels like a rare free market frontier. Capital flows to merit, and ideas that work attract funding. No zombie companies here – it’s survival of the fittest. This raw efficiency births companies from nothing, ex nihilo, and it’s the closest you can get to the genesis of wealth. It’s not chaos needing reins but a dynamic engine of growth. For investors, it’s a chance to tap into value creation that sidesteps the distortions of intervention, offering returns tied to real-world impact over manipulated metrics.
A Global Opportunity, Locally Rooted
Top-tier entrepreneurs can draw capital globally today, a shift from the past when funding stayed regional. Stable, innovative hubs—like New Zealand—benefit as international money seeks high-potential ventures. Yet the ecosystem thrives on local roots: talent, ambition, and connectivity fuel growth. The returns aren’t just financial—successful exits recycle capital and expertise back into the community, amplifying the impact. It’s a flywheel where early bets can reshape an economy, not just a portfolio.
Accessibility: The Next Frontier
Historically, this asset class has been the domain of high-net-worth players—wholesale investors with deep pockets. Retail investors often get the scraps, if anything, after the best opportunities are snapped up. But that’s shifting. Funds are emerging to bridge the gap, pooling smaller sums—say, $5,000 instead of $50,000—to give everyday investors a slice of the action. It’s not about picking individual startups (a recipe for bias) but trusting experts to curate a portfolio of high-potential firms. The goal? Democratise access to returns that don’t bow to macro whims.
The Trade-Off Worth Taking
Early-stage investing isn’t for the faint-hearted. The odds of losing your stake are high, and the timeline may be longer than you’d like. But in a market where traditional diversification may be failing, these may be the returns we’ve been looking for.
**Investing always comes with the chance you won’t get the returns you expect, and most everyday investors can’t easily join early-stage opportunities. Consider seeking out independent financial advice to double-check if you can, or should, invest in this space. Icehouse Ventures is a sponsor of the Everyday Investor podcast.**
